CEO Compensation Conspiracy

CEO Compensation Conspiracy

As an employee’s position and title grows more significant within an organization, the monetary compensation is expected to grow with the seniority level and responsibilities given. However, there may be too much compensation to be deemed fair amongst the rest of society. Most CEOs over a large spectrum of industries make much more than the average worker at the company; the margins vary between the percentage between the median workers’ yearly salary and the CEO’s. The average CEO of a large U.S. corporation makes 271 times the wages of an average worker. According to a recent report on CEO pay from the Economic Policy Institute, CEOs amongst the top 350 companies made an average of $15.6 million in 2016. Most top CEOs make more in two days than an average employee does in one whole year.

Since there are hundreds of major publicly traded companies within the United States, an expectation is set that there are equally hundreds of highly compensated CEOs behind each one of these companies. As time continues, the large gap between the compensation differences is growing wider. Living wages expectations are increasing but hourly minimum wages cannot keep up since anticipated wages are not increasing at the same rate. The top 1% earned 87 times more than the bottom 50% of U.S. workers in 2016.

As of recent reports the U.S. Securities and Exchange Commision (SEC) enforces the rule for CEO Pay Ratio Disclosure. This forces three broad-term requirements to occur: the median of the annual total compensation of all employees except CEO, the annual total compensation of the CEO, and the ratio of these two amounts. Overall, there are much more details to be filed by companies to determine the defined payout ratio between the CEO and employees. This is to regulate the payout ratios to CEO while forcing companies to be transparent in compensation benefits of their senior level employees compared to their average workers. Enforcement of the  rule is still relatively new; most companies delegated Human Resource (HR) department and Public Relations (PR) teams to prepare for employee and society negative reactions. There has always been an understanding that senior level employees get much larger compensations than entry level employees; however, the numerical information being released forces a much harsher reality than most assumed the gap would be.

The large gap in pay causes a toxic work environment at times.  Retail industry executives argue that their pay-ratio figures are unfair and should not be compared to other industries since the industry is comparably unique. The current company under high speculation of unfair compensation is Walmart and their CEO, Doug McMillon. McMillon made $22.8 million in 2017 alone and he is only four and a half years tenured. Whereas the median average worker of Walmart makes only $19,177 per year. The CEO makes 1,188 times more than the average employee. Walmart employs a total of around 2.3 million employees worldwide. The breakdown of McMillon’s compensation comes from a majority of $15.7 million from stock awards. Walmart is tenth company on S&P 500’s retail list of widest pay gap. The top three companies are Mattel, McDonald’s, and Gap. The highest ratio is 4,987 at Mattel as the CEO makes $31,275,289 and the median employee pay is only $6,271. All of these companies are extremely large and hire millions of employees in a large variety of jobs at various wages. Furthermore, most of these retailers rely heavily on seasonal and part-time minimum wage workers, which brings the median down dramatically causing the discrepancy to seem larger than it is. When Walmart is compared to companies such as Amazon, which doesn’t depend on retail locations, Walmart’s median salary is still only $28,446. Another differentiating factor is Amazon is based on a career focused worker while Walmart’s tends to have their workers using Walmart as a stepping stone to make money instead of career starting.  

On the other side of the coin; the argument tends to be about where else the millions can be distributed amongst the company instead of going solely to the CEO. The main debate against large executive payouts is the “if even 1 million of their yearly salary gets distributed amongst the lower seniority workers could make a huge difference” stance. This would bring society to the topic of how are CEO’s salaries determined; usually, the board of directors are in charge of this calculation. The package offered to an incoming CEO is determined by the responsibilities being placed amongst the future executive and the current strategic goals of a company. Theoretically speaking, large compensation is also used as a strategic tool to entice and encourage the CEO to make the best decisions for the executive and company. This is why most CEO have a large part of their compensations made of stock shares to hold them responsible for the betterment of not only their benefits  but the company as a whole. If there was a need to fix the payout issue than the Board of Directors is the problem that needs a solution not the CEO directly. Most tend to blame and resent the CEO directly when they rarely are involved in the salary determination process.

 

Sources:

Donnelly, Grace. “Top CEOs Make More in Two Days Than An Average Employee Does in One Year.” Fortune.com. 20 July 2017. Web 13 April 2018.

Nassauer, Sarah. “At Walmart, the CEO Makes 1,188 Times as Much as the Median Worker.” Wall Street Journal. 20 Apr 2018. Web 20 Apr 2018.

Nobel, Carmen. “Who Really Determines CEO Salary Packages?” Forbes.com. 18 Nov. 2015. Web 18 Apr 2018.

U.S. Securities and Exchange Commission. “SEC Adopts Interpretive Guidance on Pay Ratio Rule.” SEC.gov. 21 Sept. 2017. Web 13 April 2018.

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